Counting the economic cost:
How vulnerable could you be?
The economic impact
To help build societal resilience and inform risk mitigation around volcanic eruptions, we have modelled the impact an eruption could have across our three severity levels on businesses and the wider economy.
If this scenario were to take place, the global economic impact could reach $1.6 trillion over a five-year period (this represents the probability weighted average across the three severities we have modelled), with an expected loss of $14 billion (the economic loss multiplied by the probability of the event occurring).
The global losses across the three severity levels modelled range from $1.3 trillion in the least severe scenario to $4.8 trillion in the most extreme, equivalent to a reduction in global GDP of between 0.2% and 0.7% over the period.
You can use the interactive tool below to explore the economic cost of our scenario across the three severity levels.
Recovery
The below graph shows the temporal impact and economic loss from our event across the 5-year period we have modelled, with the event occurring in 2023.
The Major and Severe scenarios see a shock to the global economy in year one due to the localised physical damage and regional disruptions. Recovery from these scenarios is expected after year one, with recovery lagging only for countries with low resilience and high physical vulnerability, such as low-quality building and infrastructure construction.
The volcanic winter in the Extreme scenario has global impacts on the food supply chain and potentially long-term impacts on investment portfolios. As such the global economy is not expected to fully recover within the 5-year modelled period. The speed and scale of recovery from the initial GDP shock is dependent on the socioeconomic resilience of the countries affected, such as access to other alternative food sources or whether the country is an agriculture-oriented economy.
Regional risk
How exposed could your region or country be?
The economic impact on each region and country in this scenario will differ based on the proximity of urban areas to a volcano within a country’s borders, vulnerability of its physical infrastructure and assets, and socio-economic resilience.
From a regional level, Asia Pacific (home to 4 of the Decade 16 volcanoes) would see the greatest losses from this volcanic eruption scenario, with a potential loss of $949 billion over a five-year period. Greater China could stand to lose $658 billion, closely followed by Europe with an economic loss of $423 billion.
Japan, China and the United States are the most impacted countries.
Use the tool below to explore the potential impact of the scenario on your region or country, at the three levels of severity identified in the research.
An aggregating model: In this model, a systemic event has a significant ‘ripple effect’ of impacts across the globe. The cost of the event is aggregated up from country and regional levels to provide a global economic loss number.
– For example, the COVID-19 pandemic quickly spread around the world, affecting many countries' economies in a significant way at the same time.
A non-aggregating model: Our non-aggregating model is used for events that have a smaller ripple effect and for scenarios where the global losses are not caused by the trigger event occurring simultaneously in multiple regions.
– For example, a major volcanic eruption is likely to have a much greater impact in the country in which the volcano erupts. In our non-aggregating model, we do not assume that multiple major volcanoes erupt at once.
– Country and regional data in a non-aggregating scenario is based on the event occurring in that region and/or country. Therefore, in a non-aggregating scenario, the sum of countries’ economic losses will not equate to total regional or global economic losses.
In our volcanic eruption scenario, losses are calculated using a non-aggregating model.
Our scenario has been created by analysing the potential likelihood and severity of volcanic eruptions in proximity to 277 cities around the world.
This included an analysis of the number and proximity of active volcanoes within 100-500km of each city and their potential for a future large (VEI of 5 and above) eruption.
- The Smithsonian Global Volcanism Program defines an active volcano as one that has erupted since the last ice age (i.e., in the past c. 10,000 years); we have further categorised volcanoes that have erupted within the past 2000 years, past 50 years and since 2000.
- Similar to the Richter scale for earthquakes, the size of a volcanic eruption is measured using the Volcanic Explosivity Index (VEI). The VEI ranks eruptions from 1 to 8, with 1 being a gentle outpouring of lava and 8 being a mega-colossal explosion. VEI doesn’t consider the potential social or geographical disruption that would occur following an eruption of any size.
We used ashfall data from three volcanoes with major historical eruptions to determine the likelihood that cities within various proximities of active volcanoes would be impacted by a significant ash plume:
- Mount St Helen, Washington State, USA, 1980 (VEI 5)
- Mount Pinatubo, Philippines, 1990 (VEI 6)
- Tambora, Indonesia, 1815 (VEI 7)
Volcanic eruption threatens economic activity mainly through ash clouds, which can continue to cause disruption a long way from the volcano itself. Therefore, cities that are unlikely to be directly exposed to a volcanic eruption could still experience indirect effects due to power, internet, satellite, air traffic or other logistics disruptions. Furthermore, volcanic winters can occur when enough volcanic ash, sulfuric acid and water block the sun and cause temperatures to drop. We have considered the impact of a volcanic winter in the modelling for our most extreme scenario.
The economic vulnerability of each city has also been modelled based on the quality of its physical assets (buildings and infrastructure) and resilience to recover from the initial GDP shock is dependent on the socioeconomic resilience assessment of each city.
The results of this analysis for each city have then been aggregated up to generate the country or regional level losses. Country level losses include any major volcano within their borders.
For the global scenario we have assumed a volcano in the United States erupts: the US suffers both physical damage and supply chain effects while other countries are affected by the impact on global supply chain only.
Sector risk
Which sectors might be most at risk?
Transportation
Aviation is likely to suffer most in the immediate aftermath of an eruption as flights are grounded until the ash cloud dissipates. Losses can build as airlines face business disruption through cancelled flights, rerouting customers and returning stranded aircraft to home airports. Other modes of transport may also be susceptible depending on infrastructure damage. There will likely be knock-on impacts on supply chains across all sectors if goods cannot be transported.
Communications
The communications sector could also expect to see disruption as ash clouds may damage sensitive communication equipment, or cable damage may prevent internet access for areas.
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Retail and food and drink
In addition to the short term supply chain disruptions, long-term impacts may be felt through food instability caused by weather events, causing scarcity and price rises, and reducing consumers’ disposable income and shifting spending habits.
Healthcare
As well as having to deliver an emergency response, healthcare providers in the region directly affected by an eruption could also suffer business disruption and backlogs due to potential power and internet outages.
How can risk owners respond?
The rarest and most extreme volcanic eruptions can be colossal and little can be done to prepare for direct impacts such as lava flow or ash clouds. However for the majority of incidents, the worst impacts can be managed or mitigated.
To prepare, businesses should work with their insurers and brokers to work out how exposed they are to this risk across their operations and what realistic losses could look like. Preservation of life is the top priority, so businesses likely to be at risk from direct volcanic impact can provide training for emergencies to make sure safety procedures are well understood by employees.
Prepare for the fallout: Faced with an eruption from one of the Decade Volcanoes, there would be serious economic consequences. Businesses might be affected in a similar way to a global systemic food shortage, for example. By modelling their risk based on their exposure to other potentially systemic risks, businesses can create a broad plan of action to cope with a volcanic eruption.
Financial challenges: As with many other systemic risks, there is likely to be economic uncertainty in the wave of an extreme event. That means investments – particularly in directly affected industries such as aviation – could dip. Anticipating which sectors are most likely to be affected and managing exposures accordingly could help to avoid the worst impacts.
Download the key insights
We have consolidated the insight and key financial data from this scenario in a summary takeaway document.
Explore the impact of volcanic eruption
The role of insurance
Additional insight from the scenario
Disclaimer
This report has been produced by Lloyd's Futureset and Cambridge Centre for Risk Studies for general information purposes only.
While care has been taken in gathering the data and preparing the report Lloyd's and Cambridge Centre for Risk Studies do not, severally or jointly, make any representations or warranties on behalf of themselves or others as to its accuracy or completeness and expressly exclude to the maximum extent permitted by law all those that might otherwise be implied.
Lloyd's and Cambridge Centre for Risk Studies accept no responsibility or liability for any loss or damage of any nature occasioned to any person as a result of acting or refraining from acting as a result of, or in reliance on, any statement, fact, figure or expression of opinion or belief contained in this report. This report does not constitute advice of any kind.
Note that this report does not seek to replace or inform any of the mandatory scenarios which Lloyd’s publishes to support the Realistic Disaster Scenario exercises managing agents are required to undertake in respect of the syndicates managed by them.